new jersey sandy disaster recovery fraud prevention …sandy integrated recovery operations and...

New Jersey Sandy Disaster Recovery Fraud Prevention Conference

Trenton, NJ November 15, 2013

HUD-OIG Presenters John P. Buck

• Deputy Assistant Inspector General for Audit – Eastern Field Operations

Cary Rubenstein • Special Agent in Charge, Office of Investigation Region 3

Images of NJ Sandy

Impact

NJ Sandy Disaster Recovery

Public Law 113-2 • Appropriates $16 billion for the “most impacted and

distressed” communities that suffered a Presidentially-declared disaster in 2011, 2012, or 2013

• Funds must be used for necessary expenses related to disaster relief, long-term recovery: – restoration of infrastructure, – housing, and – economic revitalization

What is HUD OIG? The HUD Office of Inspector General (OIG) was created with the

signing of the Inspector General Act of 1978 (Public Law 95-452).

The Act sets out certain authorities that permit the OIG to initiate, carry out and complete audits and investigations of HUD programs and operations.

OIG is an independent office within HUD.

Inspectors General are Authorized to Access all records and information of the agency and program

participants.

Conduct audits and criminal investigations.

Issue subpoenas for records and documents.

Hire staff and control budget resources.

HUD OIG’s Mission The Office of Inspector General

Promotes the integrity, efficiency, and effectiveness of HUD programs and operations to assist the Department in meeting its mission.

Detects and prevents waste, fraud, and abuse.

Seeks administrative sanctions, civil recoveries, and/or criminal prosecution of those responsible for waste, fraud, and abuse in HUD programs and operations.

Risk Assessment

• Some elements considered in assessing risk include: – Funding type/amounts – HUD monitoring efforts – HUD-assigned risk levels

External Audit Work Performed related to Hurricanes Katrina, Wilma, Ike, Gustav, and Dolly

& Lessons Learned

"Those who cannot remember the past are condemned to repeat it“

George Santayana

Audit Work Performed

Reports Issued

Past Audit Findings Contracting Eligibility of Recipients Duplicate Benefits IT System Issues Insurance Issues

Contracting Issues • Ineligible cost plus a percentage of cost contract types. • Violations of State procurement requirements. • Inadequate procurement history documentation. • Poorly written and vague contracts. • Significant contract modification without determining

whether additional competition was necessary.

Eligibility of Recipients • Lack of documentation to support eligibility of recipients. • Duplicate benefits. • Assistance to ineligible recipients.

Subrecipients Lack of State monitoring and oversight to ensure that subrecipients

– Followed its policies and that those policies complied with program requirements.

– Were meeting deadlines. – Only spent funds on eligible expenses. – Reported on results as required.

IT System issues • IT system allowed issuance of funds even though

recipients were flagged as ineligible. • Significant amounts spent on developing IT systems,

but the States did not own the systems. Two states licensed additional software to replace the systems that were developed.

Insurance Issue • No requirement for adequate homeowners insurance

for the homes built or rehabilitated with Disaster Recovery funds.

New Jersey Background New Jersey received $1.8 billion in the first allocation of

CDBG-DR appropriations. Signed grant agreement for $1 billion May 13, 2013. Nine counties were determined to be most impacted and

distressed. CDBG-DR funds may be expended in all New Jersey

counties.

New Jersey Background Governor designated the Department of Community Affairs (NJDCA) as the

lead agency for administering the State’s CDBG-DR funds. • hiring 80-100 staff to fill positions in its Sandy Division. • creating a small audit team within the Sandy Division to perform eligibility

testing and other risk-based reviews.

The State’s action plan consists of 17 programs.

Sub recipient agreements were made with the following State agencies to administer some programs.

• New Jersey Economic Development Authority (NJEDA) • New Jersey Housing and Mortgage Finance Agency (NJHMFA) • New Jersey Redevelopment Authority (NJRA)

Hurricane Sandy Disaster Recovery Audit Planning

Fund Allocation by Program Hurricane Sandy Disaster Recovery Audit Planning

Program Responsible

Agency Funds Allocated

(in millions)

Funds Available From First Grant Agreement

(in millions) Planned Program Implementation

Reconstruction, Rehabilitation, Elevation and Mitigation Program NJDCA $600.0 $158.0 August 2013 Grants/Forgivable Loans to Small Businesses NJEDA $260.0 $169.0 July 2013 Housing Resettlement Program NJDCA $180.0 $180.0 July 2013 Fund for Restoration of Large Multi-Family Housing NJHMFA $179.5 $116.7 TBD Direct Loans for Small Businesses NJEDA $100.0 $50.0 TBD Administrative/Planning NJDCA $84.0 $54.6 July 2013 Neighborhood and Community Revitalization NJEDA $75.0 $37.5 TBD Small Rental Properties NJDCA $70.0 $35.0 July 2013 Continuation and Enhancement of Essential Public Services NJDCA $60.0 $60.0 TBD FEMA Match Program NJDCA $50.0 $50.0 July 2013 Incentives for Landlords NJDCA $40.0 $20.0 TBD Blight Reduction Pilot Program NJDCA $30.0 $11.1 TBD Sandy Home Buyer Assistance Program NJHMFA $25.0 $12.5 TBD Sandy Special Needs Housing Fund NJHMFA $25.0 $12.5 TBD Tourism Marketing NJEDA $25.0 $24.6 July 2013 Pre-development Fund NJRA $10.0 $5.0 TBD Supportive Service Program NJDCA $10.0 $4.9 TBD Code Enforcement NJDCA $6.0 $4.8 July 2013

Total $1,829.5 $1,006.2

Audit Planning

• Reviewed the State’s HUD-approved action plan.

• Identified and reviewed applicable regulations, agreements and guidance.

• Gained an understanding of the State’s organizational structure, information systems, procedures, and internal controls.

• Interviewed appropriate State staff and HUD officials.

• Reviewed policies, procedures, and other documentation.

Audit Possibilities 1. Tourism Marketing

2. Sandy Integrated Recovery Operations and Management System (SIROMS)

3. Super Storm Sandy Housing Incentive Program (SSHIP)

4. Reconstruction, Rehabilitation, Elevation and Mitigation (RREM) Program

5. Grants and Forgivable Loans to Small Businesses Program

6. Housing Resettlement Program

Tourism Marketing Contracting

$25 million allocated Congressional interest - letter from Representative

Frank Pallone, Jr. requesting HUD OIG audit the procurement process Total draw downs to date - $9.3 million

Potential Area for Audit: #1 Tourism Marketing

Sandy Integrated Recovery Operations and Management System (SIROMS)

$38.3 million Contract awarded to CGI Federal Inc. on 5/24/13

Fully functional turnkey IT solution that will allow the State to quickly deploy its CDBG-DR program to assist State residents impacted by Super Storm Sandy

Contractor operated and managed; web-based and housed in a secure cloud environment

Potential Area for Audit: #2 SIROMS

Superstorm Sandy Housing Incentive Program (SSHIP)

$67.7 million contract awarded to Hammerman & Gainer International (HGI) on 5/7/13

Contractor will intake applications and direct applicants toward appropriate housing program (RREM, Housing Resettlement Program, Small Rental Properties)

Contractor will establish intake centers in each of the nine most impacted counties Contractor will be responsible for developing an application process, determining eligibility,

loan closings, monitoring, and closing-out the programs

Contractor will be responsible for disbursing funds only for the Housing Resettlement Program

Potential Area for Audit: #3 SSHIP

Why these contract audits?

• Significant dollars and contracts are underway • Contracts are critical to a large portion of the

State’s CDBG-DR grant • Congressional Interest

Potential Area for Audit: #3 SSHIP

Homeowner Reconstruction, Rehabilitation, Elevation and Mitigation (RREM) Program

$600 million program will provide grants to eligible homeowners to restore their storm-damaged homes.

One lead contractor and two secondary contractors will manage the program.

Total draw downs to date - $3.0 million. State’s largest disaster recovery program. Homeowners assisted starting August 2013.

Potential Area for Audit: #4 RREM

Grants and Forgivable Loans to Small Businesses

$260 million program offers aid through grants of up to $50,000 to small businesses which sustained physical damage from Sandy.

NJEDA, a sub-recipient, will manage the program. Total draw downs to date - $1.6 million.

State’s second largest disaster recovery program.

Businesses assisted starting July 2013.

Potential Area for Audit: #5 Grants and Forgivable Loans to Small Businesses

Housing Resettlement Program $180 million program provides a $10,000 incentive payment to

participants for financial relief to encourage them to remain in their homes

Program will be managed by the SSHIP contractor

Total draw downs to date - $67.3 million State’s third largest disaster recovery program Homeowners assisted starting July 2013

Potential Area for Audit: #6 Housing Resettlement Program

How to Avoid Audit Findings

• Know or Find Out the Rules and Regulations. • Enforce the Rules and Regulations. • Communicate With HUD. • Get Training. • Create and Keep All Necessary Documentation. • Develop and Implement a Good Control Structure.

Potential Area for Audit: #6 Housing Resettlement Program

SUPER STORM SANDY PRESENTATION Special Agent in Charge - Mid Atlantic Region Cary Rubenstein Trenton, NJ | November 15, 2013

OIG Office of Investigation The Office of Investigation (OI) initiates investigations about possible violations of laws or regulations in the administration

of HUD programs and activities, or misconduct on the part of HUD employees and/or the recipients of HUD funds. HUD

OIG is obligated to detecting and deterring fraud and criminal activities throughout all of HUD's programs.

Our highly skilled team of criminal investigators, forensic auditors, information technology specialists, management

analysts, and administrative support staff are dedicated to this objective. We have 7 regional offices and 39 field offices

nationwide. Our offices are committed to addressing allegations in an independent and objective manner. These

allegations may involve possible criminal violations and program irregularities for civil and/or administrative actions.

Super Storm Sandy Presentation

OIG Partnerships:

Federal Law Enforcement Including: •

– Federal Inspectors General (73 statutory) – Federal Bureau of Investigation – U.S. Postal Inspection Service – Internal Revenue Service

Department of Justice: •

– U.S. Attorney’s Office – Main Justice – National Center for Disaster Fraud

Other Federal, State and Local Agencies: •

– State Licensing Agencies – Insurance Commission

Fraud Briefly, fraud is an intentional deception, which results in action or reliance by, and injury or damage to, another party. It usually consists of misrepresentation, concealment, or nondisclosure of a material fact, or at least misleading conduct, devices, or contrivance.

Who could perpetrate a fraud? • Contractors • Employees • Management • Recipients • Organized Crime • Criminals that take advantage of the programs

Types of OIG Investigations:

• False Statements/Claims • Insurance Fraud • Theft • Bribes / Kickbacks • Bid Rigging • Prevailing Wage Fraud • No-show jobs • Artificial Price Market

Inflation

• Contract Fraud – Invoicing and Double Billing

• Environmental Crimes • Public Corruption by

Organized Crime • False payoffs • Wire Fraud and Mail

Fraud • Embezzlement

Administrative Enforcement

• Limited Denial of Participation • Suspension • Debarment • Civil Monetary Penalties • Program Fraud Civil Remedies Act

Potential Fraud Appraisers & Code Enforcement

Officials

• Inflating value of structural damages • Soliciting bribes • Accepting kickbacks from homeowners and contractors

Potential Fraud Homeowners

Falsifying Applications – Misrepresenting primary residence – Failure to Report Insurance Proceeds, SBA Loans etc. – Misrepresenting Property Ownership – Failure to report Lien Information – Multiple Applications – Misrepresenting storm damage

Potential Fraud Homeowners

• Paying/Offering Bribes or Kickbacks to Appraisers for inflated cost estimates • Paying/Offering Bribes/Kickbacks to Program Administrators to qualify for programs

Potential Fraud Contractors

• Failing to begin or complete the work • Substandard work • Providing substandard materials/ product substitution • Kickbacks/bribes • Failure to pay prevailing wages

5 Year Gulf Coast Disaster Fraud Report (2005-2010)

• 1,464 Complaints received: (10/1/2005 to 8/5/2010) • Investigations initiated: 381 • Indictments: 269 • Convictions: 264

• Court ordered restitution: $2,377,872 • Court ordered fines: $ 4,500

What steps can you take to prevent fraud?

• Educate employees regarding fraud indicators, what

to look for and how to report it. • Create an environment in which employees

understand that dishonest acts will be detected and promptly addressed.

• Send a message that your operation is proactively looking for fraud and will immediately report it to the authorities.

Leroy Brown Investigation

Investigation started November, 2003

The Newark Salvation Army Branch made a referral to the NJ US Attorney’s Office. Their audit uncovered potential allegations of fraud in connection with rental assistance programs funded by HUD, Housing Opportunities for People Living with Aids (HOPWA) program and FEMA through their Emergency Food and Shelter National Board Program.

Principal Allegations of Audit Report • 532 checks totaling $349,855 were issued to landlords for

rent assistance with no case record of client on file. • Issued checks were all cashed at same check casher. • Sampling of court documents included Warrants for

Removal and Complaints for Eviction. These documents appeared to be invalid due to the invalid docket numbers.

• Caseworker’s signatures affixed to the supporting data did not appear to be authentic, for example they looked photocopied or stamped.

Example of fraudulently prepared Warrant of Removal

Defendants

• Leroy Brown – the Financial Manager of the Newark Branch of the Salvation Army.

• Susan Bigelow – An acquaintance of Leroy Brown who cashed the checks.

Who cashed the checks made payable to the alleged landlords?

• Check cashing business that cashed all of the alleged fraudulent checks was subpoenaed.

• By the use of regiscope software, hundreds of pictures of Susan Bigelow, the individual who cashed the fraudulent Rental Assistance checks were provided.

Bigelow is interviewed at home

• At first she stated that she never cashed a check for Leroy Brown.

• After viewing her pictures taken at the check-casher she admitted that she did in fact cash checks for Brown but it was done as a favor and she didn’t receive any compensation.

Bigelow is Served a Target Letter and is interviewed at US Attorney’s Office

• At first Bigelow claims to have accepted $25 per check from Leroy Brown.

• Bigelow eventually admitted receiving $125 per check.

Leroy Brown is interviewed at IRS Office

He admits to forging the second signature on checks after the checks were negotiated to give the appearance to Salvation Army Auditors that checks were approved with the correct procedures.

Example of a fraudulent stamped second signature to a check made payable to a

purported HOPWA Landlord

Attempts to locate alleged HOPWA tenants and landlords

• AutotrackXP is queried in attempt to

locate any purported landlords or rental assistance clients. There are no records for any of the alleged landlords or rental assistance clients.

• Investigators try to locate a test group of the alleged tenants and landlords. None of the landlords or tenants are located at the places indicated in the files. It is determined that all of the names are fraudulent.

Financial Analysis

Brown’s financial records are analyzed. Cash deposits into Brown’s bank are found. These deposits corroborate allegation of embezzled funds.

On April 3, 2006 Bigelow pled guilty to Conspiracy to Steal Federal Program funds in violation of 18 U.S.C. 371 for an amount in excess of $300,000.

On April 6, 2006 Brown is indicted on charges of Conspiracy to Commit Program Fraud and Tax Evasion in violation of 18 U.S.C. 371, 18 U.S.C. 666 and 26 U.S.C. 7201 for the amount of $385.760.

On April 7, 2006, Leroy Brown was arrested at his home by Agents from IRS-CI and HUD-OIG.

Sentencings • Bigelow was

sentenced to 10 months prison, 2 years probation and $385,760 in restitution.

• Brown was sentenced to 37 months prison, 3 years probation and $385,760 in restitution.

CPD - City of New Brunswick Neighborhood Preservation Program Cary Rubenstein

Source of Investigation

In September 2006, contractor reported to authorities that he noticed a pattern that his losing bid proposals made to the City of New Brunswick on Neighborhood Preservation grants had the bid amounts whited out and replaced with a lower amount.

Analysis of Records Obtained program files and all bid records

broke NPP down by year: -Contractors -Amount of jobs -Frequency of jobs -Money earned -Change orders

Pattern of winning bids

Pattern of Breakdown of Contracts

Bank Records Analysis

Subpoenaed bank records: – Friendly Maintenance – TAJ Maintenance – William Walker, Director of NPP – Richard Kaplan, Inspector/Zoning Officer

Interviews

• Glenn Patterson- Director of Community, Planning, & Development, City of New Brunswick

• Each contractor on New Brunswick NPP list • NPP employees • Other City of New Brunswick employees

What they told us Contractors

– No public opening of bids – Submitted lowest bid and still lost the job – Stopped submitting bids because tired of losing – Difficult to obtain names and winning amounts on each bid

from NPP office – Noticed alterations on bids – William Walker wanted work done on his personal residence

for low cost

What they told us

• Other City of New Brunswick employees advised of an outside business relationship between William Walker and Friendly Maintenance.

• Friendly Maintenance and TAJ Maintenance worked on City of New Brunswick employee homes for little or no money in return for bigger contracts in the future not related to the NPP program.

What the bank records told us

Friendly Maintenance was writing checks to cash and placing the name and /or the initials of the city official who they were bribing in the memo column:

– William Walker, Director NPP – Richard Kaplan, Inspector/Zoning Officer – Linda Roach, Secretary of NPP

What the subpoenaed records told us

• TAJ Maintenance kept a journal that detailed each and every bribe payment made to a city of New Brunswick official, including date and amount.

• Each entry made in the journal was backed up by a check found in TAJ Maintenance bank records.

What the bank records told us

• William Walker had tens of thousands of dollars in unexplained cash deposits in his bank account during the period from 2003-2006.

• Richard Kaplan had thousands of dollars in

unexplained cash deposits in his bank account from 2003-2006.

Additional Fraud • Steven Scott, Housing Inspector, City of New

Brunswick, applied for and received a grant from the NPP using his father’s name.

• His father, 90+ years of age, resided full-time in Georgia.

• Forged father’s signature on application. • Scott was income ineligible.

What did Friendly Maintenance say?

• Joseph McNulty and Sam John admitted to paying William Walker $3,000 a month in cash in order to receive winning bids.

• Both admitted to paying Richard Kaplan $500 a month in cash for lenient inspections.

• Both admitted to paying Linda Roach $50-$100 per month for expedited payments.

What Did TAJ Maintenance say?

• George Thomas and George Karot each admitted they paid William Walker $2,500 a month in cash in order to receive winning bids.

• Both admitted to paying Richard Kaplan $500 a month in cash to receive lenient inspections.

• Both admitted to paying Linda Roach $50-$100 a month in cash to receive expedited payments.

What did William Walker say? • What are you talking about?

• I never took a nickel from anybody!

Sentencings Sam John

– 21 months in prison George Thomas – 21 months in prison George Karot – 21 months in prison Joseph McNulty – 24 months in prison

Sentencings (Cont.)

• Linda Roach was sentenced to 5 months home confinement and 5 months in a community detention center.

• Richard Kaplan was sentenced to 30 months in jail and a $30,000 fine.

• On April 18, 2008, Steven Scott was sentenced to 2 years probation and restitution of $19,480.

Kaplan reappears While in prison Kaplan arranges for a hit man to

have his wife killed. Not happy with his wife, also New Brunswick

employee since she filed for divorce after he was sentenced.

How Discovered? • Kaplan has conversations with his bunk mate.

• Bunk mate contacts USSS. • USSS contacts USAO and AUSA who handled the

case against Kaplan. • AUSA reaches out for HUD and FBI.

Next Steps?

• Bunk mate arranges meeting with Kaplan and undercover FBI agent in prison.

• Kaplan makes a $5,000 payment through his accountant with the undercover agent.

• Directions on method and time of killing is outlined in final meeting in prison.

• Kaplan caught on audio and videotape.

Kaplan Charged • On April 3, 2008, Kaplan is arrested and charged with

Conspiracy to Commit Murder.

• On August 19, 2008, Kaplan pleads guilty.

• On February 27, 2009, Kaplan fires his attorney and sentencing is delayed.

William Walker

On April 30, 2008, Walker pled guilty in federal court to one count of Extortion and one count of Filing a False Tax Return.

Walker Sentencing

William Walker was sentenced to 87 months in federal prison for accepting approximately $112,000 in bribes. Walker was sentenced to an additional 36 months for filing a false tax return. Walker was also ordered to pay $112,000 in restitution.

Team effort… • HUD CPD Staff

• HUD-OIG auditors • New Brunswick Police Department • Middlesex County Prosecutor’s Office • FBI • IRS • United States Attorney’s Office, District of New Jersey • AUSA Brian Howe

• Hurricane Sandy Offices • Region 1/2 - New York, NY • Office of Investigation • Special Agent in Charge Christina Scaringi • 26 Federal Plaza, Room 3437 • New York, NY 10278-0068 • Telephone number: (212) 542-7277 • Facsimile number: (212) 264-4933 • • Region 3 - Philadelphia, PA • Office of Investigation • Special Agent in Charge Cary Rubenstein • The Wannamaker Building • 100 Penn Square East, 10th Floor • Philadelphia, PA 19107-3380 • Telephone number: (215) 430-6747 • Facsimile number: (215) 656-3409

Title of Presentation

Websites

Office of Inspector General Locations: www.hudoig.gov/about/where-were-

located

Semi-annual Reports to Congress: www.hudoig.gov/reports-

publications/semiannual-reports

Questions?

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